The Taxation Truth Revealed In Both Red and Blue States

Recent tax-policy developments in blue and purple states point to a growing recognition that penalties imposed on work harm local economies, ultimately hurting job creation and retention, business reinvestment, and spending on critical social and educational programs.

The data that state leaders now have available to them provides a clear pathway for designing pro-growth tax policies and brings to mind Winston Churchill’s notion that “a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

A new report issued in mid-August by the American Legislative Exchange Council (ALEC) examines the growing evidence that blue and purple states are identifying income tax policies that they know are constraining growth, contributing to the state’s overall poor performance, and hurting employers and families.

You may recall reading in this column about the liberal stronghold of Washington, D.C., where the District Council reduced income taxes on individuals in order to attract and keep small businesses and young working families -- a wise choice that won a near-unanimous Council vote of 12-1.

This column also reported on Missouri Attorney General Chris Koster, who distinguished himself as a pro-growth 2016 Democratic gubernatorial candidate in an opinion piece in which he calls for improving Missouri’s overall business climate by cutting burdensome income taxes.

ALEC’s recently updated report reveals that across the country, a new age of economic enlightenment is beginning to shine in historically left-leaning and battleground states.

Consider New Mexico’s Governor, Susana Martinez, who along with the state legislature reduced income tax on employers from 7.6% to 5.9%. And while the final tax package was a compromise that included tax incentives and deductions for special interests that in the short-run can distort the state’s real economic performance, it reflects a growing popularity of the idea that tax policy matters and can promote economic expansion or stop it dead in its tracks.

According to the 2011 Tax Foundation's Business Tax Climate Index (BTCI), New Mexico ranked 14th-lowest in the country. Clearly, elected leaders recognized that the state needed to up its competitive advantage in light of neighboring state BTCI rankings, such as Arizona (22nd), Texas (11th), and Colorado (19th). When one takes into account the facts presented in Travis H. Brown’s How Money Walks(New Mexico lost about $1.4 billion in adjusted gross income between 1992 and 2011 to these three low and no-income tax states), it is clear that the Land of Enchantment’s new tax policy direction is on the right path.

The ALEC report also points to “The Michigan Comeback” as one of the most remarkable examples of enlightened leadership on tax policy. Just five years ago, Michigan ranked 34th in the country in ALEC’s annual Rich States, Poor States State Economic Competitive Index, “By the end of 2013, Michigan—the longstanding bastion of organized labor—could no longer deny economic realities…” Elected officials repealed the business tax, are phasing out personal property taxes, and are reducing government bureaucracy – all of which have increased the Wolverine State’s competitive advantage. And they did not stop there. In 2014 the state’s policy shifts moved its ranking up 22 positions to 12th-most competitive state in the country.

As reported here earlier this summer by www.wealthofstates.com, Governor Chris Christie, representing the “Deep Blue” state of New Jersey, showed tremendous leadership when he vetoed more than $1 billion in new taxes and signed a balanced budget. Garden State taxpayers have good reason to applaud Governor Christie for this bold and righteous move that addresses the state’s alarming loss of $22.3 billion in net adjusted gross income between 1992 and 2011, with nearly half of that sum heading to the no-income tax state of Florida.

In the last few years, Rhode Island, a state that has long held a historically bad business climate, has started to realize the error of its ways. Four years ago, the legislature reduced the top income tax rate down to 5.99 percent. This year, employers will realize a 2-point reduction in their income taxes.
Next year, the corporate tax rate will fall from 9 to 7 percent. These are real savings that over time can be used to reinvest in equipment, hire more people and contribute to the states overall economic health.

These tax policy changes are no coincidence. Enlightened state leaders face tremendous backlash from special interest groups. But, as this ALEC report shows, along with several other notable resources, when it comes to economic competitiveness, when the time arrives for people to decide where they want to live, work, raise their families, and locate their businesses … tax policy is a key factor in that decision-making process. More and more elected leaders and voters in red, blue, and purple states are beginning to see the bright light of economic freedom and are doing all they can to play catch up with those states that long ago realized what smart tax policy can mean for families and the political futures of so many.